Market Place; If Oil Prices Head Down This Summer, Oil Stocks May Follow.

By Thomas C. Hayes

Published: June 22, 1993

DALLAS—
STOCKS of many major oil companies have lost a little ground since trading at or near their all-time highs in April and May. And if the discord at OPEC's Geneva meeting two weeks ago sends oil prices down this summer, as many analysts expect, the oil stocks will also head lower.

Kuwait rejected urgings by the 11 other OPEC members at the meeting to limit its daily production to 1.6 million barrels, and will raise its production instead to two million barrels by July 1 on the way to what the Persian Gulf emirate hopes will be 3.5 million barrels by 1995.

With Iraq still on the sidelines, with a production capacity of three million barrels, and Iran, Nigeria and other OPEC members already cheating on their production limits, analysts say that another glut of world oil supplies is taking shape.

"The supply-demand balance is not that far out of whack, but we see the potential fight for market share sending prices lower," said William L. Randol at Salomon Brothers Inc. "I don't look for a price collapse, but gradual price erosion."

Oil prices were little changed yesterday, at $18.69 a barrel for domestic crude, but Mr. Randol and others see prices falling below $18, perhaps in the next few weeks.

Since stocks of many major oil companies reached or approached their highs in early May, oil prices have dropped by 7 percent while prices of the dozen biggest oil majors have dropped only two percentage points -- matching the drop in the Standard & Poor's index of 400 industrials.

Michael L. Mayer, oil analyst at Wertheim Schroder, thinks investors have been slow to react to the bearish developments at the OPEC meeting. After riding gains of 20 percent or more from December through April in many stocks of Big Oil that he tracks, Mr. Mayer concluded on May 27 that most would underperform the market for several weeks, falling 5 to 10 percent.

Royal Dutch/Shell, Exxon, Chevron and Mobil were among the large international oil companies that reached price records this spring. But when Mr. Mayer saw that those prices in some cases were approaching the highest levels of the last 20 years, compared with earnings and cash flow, he figured it was time to stop buying.

"The OPEC agreement is not a disaster for oil prices, but it removes any meaningful upside for oil prices over the next few months," Mr. Mayer said. "The only attractive thing is the yields, and they aren't as good as they had been."

The dividend yields of the 12 largest oil companies is now about 50 percent higher than the average of the S.& P. 400, he said, down from a premium of 80 percent before stock prices moved higher through the winter and into early spring.

Most oil companies will report higher earnings in July for the quarter ending June 30, thanks to higher natural gas prices and improved refining profits, but the numbers will amount to a snapshot of the rearview mirror, not the road ahead.

Some analysts think oil prices will range from $12 to $20 for the rest of the decade. Norman P. Higby, an energy forecaster in Menlo Park, Calif., said Kuwait's stance was the latest, strongest evidence of a widening fissure within OPEC.

The split is among countries that only export crude, and those using it increasingly as a low-cost raw material for refined products, namely gasoline. Kuwait, Saudi Arabia and Venezuela have large chains of service stations that sell gasoline in the United States and Europe. Iran, Iraq, Nigeria and others do not.

Mr. Higby said that many OPEC producers would continue to cheat to grab market share, depressing prices, even though they need higher prices for national spending programs. So even with a new Federal tax on gasoline, he said, consumers probably will not notice it at the pump.